It has been about a month since the last earnings report for Zillow Group (ZG - Free Report) . Shares have added about 18.7% in that time frame, outperforming the S&P 500.
Will the recent positive trend continue leading up to its next earnings release, or is Zillow due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.
Zillow Group Beats on Q3 Earnings Estimates, Lowers '18 View
Zillow Group reported mixed third-quarter 2018 results. Further, the company lowered fiscal 2018 revenue guidance.
The company delivered non-GAAP earnings of 18 cents per share, which came ahead of the Zacks Consensus Estimate by a penny. However, the figure decreased 5.3% from the year-ago figure of 19 cents per share.
Total revenues increased 22% year over year to $343.1 million, but marginally lagged the Zacks Consensus Estimate of $344 million. The figure came within management’s guided range of $337-$347 million.
Strong improvement of the company’s Premier Agent Business primarily drove year-over-year revenue growth. New construction marketplaces and Rentals also aided growth. Zillow is striving to increase audience size and improving consumer engagement via advertising and other related marketing initiatives.
In second-quarter 2018, the company started reporting results in two segments; namely Internet, Media & Technology ("IMT") and Homes.
The IMT segment will comprise the Premier Agent, Mortgages, Rentals, dotloop and display revenues. Revenues from new construction marketplaces, marketing, and business products and services catering to real estate professionals will also be reported under IMT.
The Homes segment will comprise the company's buying and selling of homes directly, announced in April, this year.
Zillow reported Premier Agent revenues of $232.7 million (67.8% of total revenues), increasing approximately 18% year over year.
In the third quarter, Rentals revenues surged 31% on a year-over-year basis of $37.3 million. The year-over-year increase was primarily due to robust growth in number of average monthly monetized, more rental listings on mobile apps and websites Moreover, higher adoption of technology stack for property managers, landlords and renters positively impacted the segment.
However, Mortgages revenues declined 12% year over year to reach $18.4 million. Notably, average revenue per loan information request declined 22% year over year, primarily due to ongoing transition to Connect subscription-based platform.
Other revenues came in at $43.6 million, up 23% year over year, mainly due to 54% year-over-year increase in revenues from New Construction marketplace and dotloop.
During the reported quarter, traffic increased about 7% to more than 186 million average monthly, unique users. During the quarter, visits improved 13% year over year to 1.9 billion. Management noted that the high visitor rate was driven by improvement in product lines, which increased its app downloads. The increase in visitors is a positive as it enhances the probability of generating leads for agent advertisers.
Premier Agent Direct program enables agents to advertise on Zillow, Trulia, and Facebook. Newly added feature to the program, that enables a marketing link to be established with customers, is enhancing user-experience as it automatically generates printed postcards and mails to customers.
The company regularly adds new features to bolster experience for property managers and consumers. Rental Inforum is aimed at making property managers better understand the preferences of consumers. “My Agent” can detect when a premier agent is actively engaged in discussions with a consumer and replaces the agent list with a contact box featuring only the chosen agent.
Coming to Homes segment, revenue came in at $11 million, more than management guided range of $2-$7 million. During the quarter under review, Zillow bought 168 homes and sold 36 homes.
Margins and Balance Sheet
Adjusted EBITDA as a percentage of revenues came in at 19% as compared with 25% reported in the year-ago quarter, primarily due higher expenses along with effect of compensation increase from the highly competitive market.
As of Sep 30, 2018, cash & cash equivalents and short-term investments were $1.64 billion, up from $899.6 million reported in the previous quarter. Long-term debt came in at $6.9 billion as compared with $3.94 billion in the previous quarter.
Cash flow from operating activities was $1.02 billion for the nine months ended Sep 30, 2018.
Management expects fourth-quarter 2018 revenues to remain in the range of $340-$357 million.
The company expects Premier Agent revenues in the range of $221-$225 million, rental revenues of $35-$36 million, and mortgage revenues of $21-$22 million. Homes segment revenues are expected to be in the range of $20-$30 million.
Adjusted EBITDA is anticipated to remain in the range of $26-$38 million.
Management lowered guidance for 2018. Revenues are now projected in the range of $1.307-$1.324 compared with the earlier range of $1.320-$1.350.
The EBITDA outlook now ranges between $195 million and $207 million, down from the previously projected range of $237 million and $253 million due to an anticipated decrease in Mortgage revenues and increase in headcount expenses.
Considering the Homes segment, Zillow is maintaining Dec 31, 2018 guidance. The company continues to intend to hold 300 to 550 homes.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed a downward trend in fresh estimates. The consensus estimate has shifted -3662.5% due to these changes.
At this time, Zillow has an average Growth Score of C, though it is lagging a lot on the Momentum Score front with an F. Following the exact same course, the stock was allocated a grade of F on the value side, putting it in the bottom 20% quintile for this investment strategy.
Overall, the stock has an aggregate VGM Score of F. If you aren't focused on one strategy, this score is the one you should be interested in.
Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Zillow has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.